Support

A cookie is a piece of data stored by your browser or device that helps websites like this one recognize return visitors. We use cookies to give you the best experience on BNA.com. Some cookies are also necessary for the technical operation of our website. If you continue browsing, you agree to this site’s use of cookies.

Marketing Services

Bloomberg Next marketing services allow clients to elevate their brands and extend their reach through our established and trusted expertise, enhanced with engaging event production, appealing design, and compelling messaging.

Report Asks: Does IRS Administration of Tax Penalties Further or Hinder Voluntary Compliance?

Encouraging voluntary compliance is the end game for the
penalties under the tax code, but the IRS’s penalty actions may be detracting
from that goal, an agency advisory panel said.

The report
released Nov. 16 by the Internal Revenue Service Advisory Council called on the
agency to conduct a system-wide review of its penalty actions to see if they
support voluntary compliance.

Much of the section of the report dealing with this issue
centered on inconsistencies in the agency’s handling of taxpayers’ requests for
penalty relief.

Such relief is available for “reasonable cause” under
Section 6664(c) of the tax code, including for violations of Section 6662(b)(2) for
substantial underpayment of income tax.

Though not mentioned in the report, this relief is also
available for penalties imposed on pension plans under Section 6662(b)(4) for
substantially overstating their pension liabilities.

Today there are more than 170 penalty provisions in the tax
code compared to just 14 in 1955, the report said.

Voluntary Compliance
First and Foremost

The report said that its recommendations on strengthening or
enhancing the fairness and consistent treatment of taxpayers are premised on
encouraging voluntary compliance.

“First and foremost, policy decisions need to be consistent
with the universally agreed-upon purpose of penalties: encouraging voluntary
compliance,” it said. “To ensure this, the effect of penalty actions on
voluntary compliance needs to be clearly understood.”

The panel recommended “the streamlining and modest
liberalization of penalty abatement decisions,” which it said would “create
greater efficiencies for the IRS, reduce the burden on substantially compliant
taxpayers, and increase voluntary compliance.”

Reasonable Cause

Taxpayers may request relief under Section 6664(c) from Section
6662 penalties by showing “reasonable cause” for any portion of an underpayment
as to which the taxpayer acted in good faith.

“The disposition of requests for reasonable cause relief,
however, varies widely,” owing to differences in the particular taxpayer’s
situation and the training and experience of IRS employees, the report said.

“In addition, the automatic, computer-generated assertion of
penalties in numerous cases has the effect of undermining the congressional
directive that the IRS should make correct penalty assertion decisions in the
first instance rather than mechanically asserting penalties and only later
correcting cases meriting penalty relief,” it said.

This was a reference to the agency’s Automated Underreporter
Program, or AUR, which flags discrepancies between the amount of income
reported by taxpayers on their tax returns and what income they report on their
information returns.

No Human Review

In general, the tax code requires that before assessing a
penalty IRS employees have written approval from a supervisor. However, an
exception allows the IRS to calculate a penalty automatically “through
electronic means.”

“The IRS interprets this exception as allowing the use of
its AUR system to propose the substantial understatement and negligence
components of the accuracy-related penalty without human review,” the report
said.

“Only if a taxpayer responds to an AUR-generated proposed
assessment will the IRS involve its employees to determine whether the penalty
is appropriate,” it said. “If the taxpayer does not respond timely to the
initial notice, the computers automatically convert the proposed penalty to an
assessment.”

Administrative
Waivers

Expanding the agency’s administrative waivers program could
alleviate some of the strain on the AUR units, freeing them up to focus on more
penalty relief requests, the report said.

The IRS Office of Servicewide Penalties, which analyzes and
evaluates the repercussions of penalty policy and administration, should “evaluate
the feasibility of developing one or more rules of administrative convenience
to abate section 6662(b)(2) penalties in particular circumstances, for example,
where the taxpayer has a history of prior good behavior and has not previously
been penalized,” the report said.

All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to books@bna.com.

Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)

Notify me when updates are available (No standing order will be created).

This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to research@bna.com.

Put me on standing order

Notify me when new releases are available (no standing order will be created)